In a world with an intellectual history of seven thousand years behind it, where do Pakistanis stand, what are they doing, what do they aspire to be, and what ought they to be doing? This Blog takes Notes of all of that ...

Tuesday, June 7, 2016

How to Privatize Successfully - Part II

If
privatisation needs to be done, it has to be done because it is the decisive
step in transforming the economic system. Regarding foreign help Dr Klaus is
very blunt: I think that the typical foreign help was sending would-be advisors
and consultants. It became one of the most profitable businesses in the 1990s -
to become a consultant and advisor in the transforming societies.

Their
recommendations weren't useful and not very good. You have had some experience
with troubles in South East Asia in the second half of the 1990s - it seems to
me that it has become an accepted truth that it was a tragic mistake of IMF
policies for all of what happened in countries like Indonesia, Malaysia and
elsewhere.

And,
he goes on: I remember I made a well-known statement that was repeated many
times, and Milton Friedman called it 'Klaus Law.' I was forced some eight or
nine years ago in the World Bank in Washington to accept, when I was still the
Minister for Finance, a foreign assistance loan, a technical assistance loan. I
said we are not interested in a loan for inviting consultants and advisors.

If
you are ready to give us a loan to build something, some infrastructure project
we can discuss it, but a technical assistance loan? I am not interested.

THE
STORY CONTINUES: They were absolutely shocked because this was exactly
what they wanted to organise - technical assistance, sending experts,
entertained in the best hotels in Prague and spending most of their time in the
lobby bars of those hotels discussing transformation. And I quite innocently
made a statement, which became quite well known. I said, "No, I am not
ready to pay hard money for soft advice." And Milton Friedman called it
the 'Klaus Law,' which I like very much!

As
to the objections on the mechanism of privatisation from its own protagonists,
Dr Klaus speaks from the point of view of a government (but sure a limited
government): We were confronted with an enormous naivety with regard to the
formation of legislation, its enforcement and the relationship between formal
legislation and informal rules, etc.

And
we have been especially criticised for our inability to create perfect
legislation. I have to argue that there is no perfect legislation. You have
parliaments just for the fact that you need to make changes to and add new
legislation to improve it - to fill some of the gaps and holes in the
legislation - it's a permanent evolutionary process in any country in the
world.

He
further states that the formation of legislation is and must be slow. It can't
be just a quick process. I must say that what I consider to be very important
is that legislation is the outcome of the process of evolution; it is not of
anyone's dictate (and if it is dictate, it plays havoc as has been the case in
Pakistan. Khalil).

As
you know very well, legislation is not the outcome of abstract rationalism.
Legislation is the result of a very complicated political process, a very very
human political process. You don't create legislation by picking the five best
lawyers from the best universities and asking them to "Please be so kind
as to give us legislation." It is discussed. Every sentence is discussed,
in your and our parliament.

And,
he admits: I'm sure you know very well that legislation is influenced not only
by political or ideological arguments, but by vested interests, by lobbying, by
what we economists call 'rent-seeking' activities. So there is nothing quite
like a body of legislation, which you can simply transfer from one country to
another and decide that this is true. There is just one example of such a
transfer of legislation in modern history, and you probably know what I have in
mind - the reunification of Germany.

It
was even the identical language. Even to translate the legislation, I can tell
you is difficult. And it was the same language, so it was easy just to announce
that the next morning the old legislation is no longer valid and the new
legislation is valid.

And
he hastily adds: I always say that our critics probably assume that we are
still a totalitarian state, where the appropriate legislation can be simply
introduced. But we know it is a very complicated political process.

This
is how Dr Vaclav Klaus, an economist and politician from the government, sees
the whole process of transition including privatisation. But, sure, if we need
free markets and do not need over-regulation or a paternalistic welfare state,
we will have to go for the three liberalizations knowing well that no single
liberalisation can bear fruit.

In
the context of privatisation in Pakistan, following points are of utmost
importance:

1.
Changing the economic system (in Pakistan also) is not an easy task as it
involves conflicts of interests, ie it threatens vested interests. Hence, it
needs a principled stand and a will to bring it about. It must be taken as a
matter of policy.

2.
Privatisation is part of an overall economic change, and a very important one;
but it will be of no use in the absence of price, trade and business
liberalizations.

3.
As in other cases, in doing privatisation also, government makes mistakes
unintentional as well as deliberate.

4.
Government must be criticised for the mistakes it makes; not only criticised
but brought to the court as happened recently in the case of Pakistan Steel
Mills privatisation; and the functionaries must be made responsible, fined and
punished.

5.
If privatisation is to be done, do privatise all of the business enterprises,
and let there be a competition. Keeping some selected enterprises with the
state with a privileged status will hurt the competition.

6.
The cost of transition, or say privatisation, must be kept in mind.

7.
The privatised units may or may not succeed; as un-protected private sector, in
sharp contrast to protected public sector, faces cut-throat competition, and,
as happens with such businesses, may meet failures.

8.
Like all other legislations, privatisation legislation may be wrong,
manipulated, manoeuvred, vested, rent-seeking, etc, and its implementation and
execution partial or flawed or skewed, but what is needed: it must be
discussed, exposed, brought to the court, and improved.

Finally,
(and so far no one has been making this point) it must be demanded that as
privatisation is lessening the size and burden of the government; in turn,
burden of taxes on people must also be lightened. This will spur both growth
and development.

The Blogger

The blogger cherishes a cosmopolitan spirit; he is a moralist; a rationalist; a philosopher; a political philosopher; he believes in Classical Liberalism, as a Theory of Conduct.
He has substantially contributed to the founding of the first free market think tank of Pakistan, Alternate Solutions Institute.
He is a writer who wrote / published dozens of articles on a variety of issues, and is author of 4 books.
He wrote / published short-stories in Punjabi, a regional language of Pakistan.
He composes poetry both in Urdu and Punjabi, and has already published one collection.